Argentina, China reach currency swap agreement

MEDELLIN, Colombia, March 31- Argentina's central bank considers its recent currency swap agreement with China as a contingency measure and the South American country does not need it for now, Argentine central bank president, Martin Redrado, said on Tuesday.

"This is a standby swap. At this moment Argentina does not need it," Redrado said during an investment conference on the sidelines of the Inter-American Development Bank annual meeting.

"It could be used to do operations for monetary and currency operations," he said.

The two governments signed a memorandum of understanding, creating a framework for the 70 billion yuan ($10.2 billion) swap on Sunday. The news was distributed by the official Xinhua news agency on Monday.

Zhou Xiaochuan, Governor of the People's Bank of China said on Monday that but both sides needed to work out final details.

The swap is the sixth that the PBOC has signed with central banks since December in a drive to free up trade-finance channels that have been clogged by the global credit crunch.

"The fact that China represents such a small share of Argentina's total trade (less than 12 percent) suggests limited impact on FX, but is an important political gimmick at this time (convertibility will remain an issue)," RBS wrote in a research note issued on Tuesday.

"Indeed, we have been talking out the view that it is in the government's best interest to maintain a stable exchange rate into the elections as a strong currency has been the pinnacle of the Kirchner's economic plan and is essential for moderating capital flight," RBS said.

This is China's first currency swap line into Latin America. China's bilateral trade with the region has grown from $15 billion in 2001 to roughly $140 billion in 2008, Zhou told delegates to the IADB meeting.

The PBOC has signed six bilateral currency swaps in recent weeks, totaling 650 billion yuan ($95 billion). The other five central banks that have signed agreements with the PBOC since mid-December are South Korea, Malaysia, Indonesia, Hong Kong, and Belarus.

(Reuters)